12.13.2018
By Shanny Basar

FTSE Russell Extends ESG Across Asset  Classes

FTSE Russell, the index, data and analytics provider has launched new green real estate indexes and is also aiming to introduce environmental, social and governance indexes in fixed income.

This month FTSE Russell  announced the launch of green indexes for the listed real estate sector.

Fong Yee Chan, senior sustainable investment specialist at FTSE Russell, told Markets Media: “Investors wanted a green version of our listed real estate indexes to integrate the risk from climate change in their strategies.”

She continued that the United Nations has estimated that buildings account for more than half of global electricity usage and about 28% of global carbon emissions.

FTSE’s existing listed real estate indexes are tracked by more than  $340bn (€300bn) in assets according to the firm. The new indexes are tilted towards sustainability to maintain a similar return profile while adjusting the constituents based on energy use and carbon emissions modelling. They incorporate building-by-building geolocation data mapping from specialist data provider GeoPhy and match the information with green certification data.

Fong Yee Chan, FTSE Russell

“Green certification increases by 63% while carbon emissions per dollar of revenue drop by 40%,” added Chan.

FTSE Russell said there is also evidence linking better environmental performance in listed real estate to higher asset values, higher occupancy rates, higher rental yield and lower operating costs.

She said: “ESG is going multi-asset. We acquired the Citi fixed income indices and we will be building ESG versions.”

Last year the London Stock Exchange Group, which owns FTSE Russell, completed the acquisition of The Yield Book and Citi Fixed Income Indices from Citigroup.

ESG data

In order to develop more ESG indices, FTSE Russell has also announced a strategic partnership with Sustainalytics, a provider of ESG and corporate governance research, ratings and analysis.

Mark Makepeace, chief executive of FTSE Russell, said in a statement: “This is an exciting development for our clients as it will provide new tools and benchmarks. The partnership with Sustainalytics enables us to provide a greater selection of options and choice to meet ever growing client demands.”

Chan continued that FTSE Russell has been working with Sustainalytics for a number of years and will continue grow its in-house sustainable capabilities while proving more choice to clients.

“There is not one way to integrate ESG and we are providing clients with more options,” she added. “We will work with Sustainalytics to develop a range of ESG versions of the Russell 1000, 2000 and 3000 indexes.”

The new Russell ESG indexes are due to be launched in the first half of next year.

The lack of definitions and clear metrics is hampering the industry according to the latest biennial study from Eurosif, the association which promotes socially responsible investment in Europe. Eurosif said in the report: “We clearly notice how the general discussions around definitions are leading to a more general concern for greenwashing, gaining ground as part of the barriers to SRI in general.”

The European Commission is aiming to address these concerns by recommending standards and a taxonomy for sustainable finance products.

Chan said: “The granularity of data is still a challenge. In May FTSE Russell launched its STEP change report, the first from the Stewardship, Transition and Engagement program, to improve disclosure and foster transparency through engagement.”

She also noted that FTSE Russell’s proprietary green revenues model uses data from issuers’ reported financial statements. FTSE Russell has estimated the size of the green economy as representing around $4 trillion or 6% of the market capitalisation of global listed companies.

Smart beta

FTSE Russell’s 2018 smart beta survey of asset owners showed that the demand for ESG indexes and tools has grown. Globally more than half, 53%, of asset owners are currently implementing or evaluating ESG considerations in their investment strategy.

Among those who anticipate applying ESG considerations to a smart beta strategy, 63% are motivated by societal considerations, a shift from last year’s top driver of avoiding long-term risk. In addition, the survey found that nearly 40% of asset owners anticipated applying ESG considerations to a smart beta strategy in the next 18 months.

This trend was highlighted in October when Merseyside Pension Fund selected a new FTSE climate and multi-factor index for the fund’s listed equity portfolio.

Aled Jones, FTSE Russell

Aled Jones, head of sustainable investing, Europe, at FTSE Russell, said in a statement: “Combining a multi-factor approach with a focused set of sustainability parameters is a new and exciting approach for the integration of sustainability and ESG considerations into passive investment strategies.”

MPF is the fifth largest fund in the UK’s Local Government Pension Scheme with £9bn of assets under management. The pension fund will use the new FTSE All-World Climate Balanced Comprehensive Factor Index, part of the FTSE Russell’s smart sustainability index series.

Owen Thorne, investment manager at Merseyside Pension Fund, said in a statement: “We are pleased to have worked with FTSE Russell to produce a low carbon index solution that provides us with an investable, risk-efficient means of achieving our decarbonisation goals.”

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